Markov Switching Models for Volatility: Filtering, Approximation and Duality

25 Pages Posted: 11 Nov 2013

See all articles by Monica Billio

Monica Billio

University of Venice - Department of Economics; Ca Foscari University of Venice - Dipartimento di Economia

Maddalena Cavicchioli

Advanced School of Economics in Venice

Date Written: November 11, 2013

Abstract

This paper is devoted to show duality in the estimation of Markov Switching (MS) processes for volatility. It is well-known that MS-GARCH models suffer of path dependence which makes the estimation step unfeasible with usual Maximum Likelihood procedure. However, by rewriting the MS-GARCH model in a suitable linear State Space representation, we are able to give a unique framework to reconcile the estimation obtained by the Kalman Filter and with some auxiliary models proposed in the literature. Reasoning in the same way, we present a linear Filter for MS-Stochastic Volatility (MS-SV) models on which different conditioning sets yield more flexibility in the estimation. Estimation on simulated data and on short-term interest rates shows the feasibility of the proposed approach.

Keywords: Markov Switching, MS-GARCH model, MS-SV model, estimation, auxiliary model, Kalman Filter

JEL Classification: C01, C13, C58

Suggested Citation

Billio, Monica and Billio, Monica and Cavicchioli, Maddalena, Markov Switching Models for Volatility: Filtering, Approximation and Duality (November 11, 2013). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 24, Available at SSRN: https://ssrn.com/abstract=2352936

Monica Billio (Contact Author)

University of Venice - Department of Economics ( email )

Fondamenta San Giobbe 873
Venezia 30121
Italy
+39 041 234 9170 (Phone)
+39 041 234 9176 (Fax)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

Maddalena Cavicchioli

Advanced School of Economics in Venice ( email )

Cannaregio 873
Venice, 30121
Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
117
Abstract Views
745
Rank
427,869
PlumX Metrics